When writing a will, it’s important to be aware of any inheritance tax that will have to be paid out of your estate. Here, we explain your inheritance tax allowance along with a few tips to help minimise your tax bill.
Our online will writing service makes it easy to write a will from the comfort of your own home in as little as 15 minutes. And one of the most important parts of writing a will is deciding what happens to your estate after you die.
This is where inheritance tax comes into play. If the total value of your estate is over the tax threshold, your estate will have to pay inheritance tax on the difference. However, you could end up paying no inheritance tax if you leave your estate to your spouse or civil partner, children, or a charity close to your heart.
Over the next few minutes, we’ll go through the inheritance tax basics so you can work out the most cost-effective way to share out your estate.
The inheritance tax threshold for 2019/20 is £325,000 – this is also known as the nil rate band. If your estate is worth more than £325,000, you may have to pay 40% on everything over the nil rate band.
If you're married or in a civil partnership and your partner is domiciled in the UK, you don't have to pay inheritance tax on anything you leave to them regardless of the size of your estate.
Married couples and civil partners are also able to pass on their unused tax allowance to their partner, which can massively increase the surviving partner's tax allowance.
Here's an example: When writing a will, Jane decides to leave her whole £500,000 estate to her husband, John – which means there is no inheritance tax due on her estate.
As Jane didn't use any of her £325,000 inheritance tax allowance, this passes onto John. John's inheritance tax allowance is now £650,000.
When John dies, he shares his £700,000 estate between his nieces and nephews. This is £50,000 over his inheritance tax allowance, so the amount of inheritance tax due is £20,000.
In April 2017, the government introduced an additional tax allowance on top of the nil rate band. This gives homeowners an extra £100,000 tax allowance if they leave their home to their children, step-children or grandchildren – or their spouses or civil partners. This allowance will increase to £175,000 in April 2021.
Like the nil rate band, it's important to understand this extra tax allowance before writing a will, as it may impact who you decide to leave your estate to.
This allowance is also transferable between married partners and couples in civil partnerships, which can increase the tax allowance for the surviving partner.
Here's an example: In January 2022, Sam leaves his £600,000 estate to his wife, Sarah. No inheritance tax is due on his estate because Sam and Sarah are married.
Sam's £325,000 inheritance tax allowance passes onto Sarah. His £175,000 homeowner allowance will also pass onto Sarah if she decides to leave the house to beneficiaries who qualify for the allowance (such as their children) when writing a will.
When Sarah dies, she leaves her entire £800,000 estate to their children. No inheritance is due on her estate because her combined inheritance tax allowance is £1,000,000 (£325,000 + £325,000 + £175,000 + £175,000).
One way to reduce your inheritance tax bill is to give gifts while you're still alive. However, it’s important that the gift is given outright, otherwise it could fail for tax purposes. If, for example, you transfer a property to your children but continue to live there and benefit from it, the gift wouldn’t qualify for exemption. If you’re considering giving any large gifts, it’s important to seek advice from a professional to make sure you’re getting the benefits you expect.
Depending on who you want to leave a gift to, there are a number of allowances you should be aware of:
It's important to consider this when writing a will. If the value of your estate is worth more than £325,000, it may be more tax efficient for you to give them money while you're still alive. It’s a good idea to seek professional advice if you’re thinking of making gifts to avoid inheritance tax.
Just like gifts to your husband, wife or civil partner, anything you leave to a charity is exempt from inheritance tax.
Here's an example: If you leave an estate worth £350,000 and include a charitable gift of £30,000, no inheritance tax would be due. This is because your total taxable estate value would be calculated as £320,000 (£350,000 minus £30,000) and therefore below the £325,000 inheritance tax allowance.
You can also reduce your inheritance tax rate by leaving more than 10% of your net estate to charity. This will reduce your inheritance tax rate from 40% to 36%. Your net estate is the amount left after deducting your inheritance tax allowance.
Here's an example: If your estate is worth £525,000, your net estate will be £200,000 (£525,000 minus your £325,000 allowance). If you then choose to leave £20,000 to charity (10% of your net estate) your inheritance tax rate will be reduced to 36%.
In this scenario, your tax bill would be £64,800, saving you £15,200 in inheritance tax. The charity would receive the full £20,000 and your children would get £440,200 (only £4,200 less than if you didn't leave £20,000 to charity).
By being smart about how you give to charity, you can maximise the efficiency of your estate to benefit a charity close to your heart.
Pensions and life insurance policies can be good ways of minimising your tax bill. With either of these, the policies may need to be written 'in trust'. This usually means that any payouts will not form part of your estate, but will instead go straight to your beneficiaries without being counted towards inheritance tax.
Our solicitor-approved will writing service can help you write a will online in as little as 15 minutes.